The number of people investing in property through limited companies has doubled since 2017. This prompts two questions:
This article answers that first question, so you can answer the second. In short, limited companies offer buy-to-let investors all sorts of benefits, from tax to estate planning.
Let’s dig into those benefits now.
Most of the time, investing through a limited company is more tax-efficient than investing in your own name. Here’s why.
When you invest through a company, you pay Corporation Tax of 19% on all profits up to £50,000. But if you invest in your own name, you’ll pay Income Tax of up to 45%.
With a limited company, you can deduct 100% of your mortgage interest payments from your rental income, meaning you only pay Corporation Tax on your profits rather than on your entire returns.
There’s often the perception that, with a limited company, you’re doomed to pay tax twice: on your rental income during the ownership period, and then again when you sell your property. But that’s not the case.
In fact, there are three ways to extract your profits tax-efficiently:
UK taxpayers get a £1,000 tax-free allowance on dividends – per shareholder, per year. It’s worth noting that this applies to your total dividend income, across all your companies. So, if you had four limited companies, you’d still only be able to take £1,000 out tax-free as dividends – not £4,000.
When you invest through a company, you technically lend that company the money for that investment. That means it can pay you back. And repayments on loans don’t count as income – so they’re tax-free.
Of course, you can’t take an Owner Loan Agreement if you invest in your own name.
With a limited company, you can extract your profits as pension contributions. And, because these count as a business expense, they’re also deductible from your tax bill (the same as your mortgage interest payments).
That means, if you extract all your profits as pension contributions, there’ll be no Corporation Tax liability, as your profits will technically be zero.
When you invest through a company, you make the whole estate planning process much smoother:
Passing on your assets through a company can be more tax-efficient for your beneficiaries.
Say you want to leave a BTL property that’s wrapped in a company. You can gift 99% of the shares in that company to your beneficiary, while retaining directorship (and control) yourself. And then, when you pass away, your beneficiary will only need to pay Inheritance Tax on 1% of the shares. That means 1% of the tax bill.
When you invest through a limited company, you discover estate planning that’s truly flexible. With a limited company, you can gift shares however you like. Transfer them to your chosen beneficiaries over a period of years, or hand over a 99% stake as soon as you incorporate. So long as your beneficiaries are over 18, it’s entirely up to you.
When you invest in your own name, though, you have no real flexibility at all.
Sleep-tight security
With a limited company, you can keep total control of your investment – even when you’ve already gifted 99% of it to a beneficiary. Just make sure you’re the company’s director, and that investment will be safe and secure until you decide the time’s right.
When you buy a property with peers – whether it’s residential or an investment – nobody owns a set amount of it by default. You all just own it together. Even if one person puts down 80% of the deposit, they’re still not legally entitled to 80% of any rental income.
For that reason, buying together can feel unclear, insecure, and – at times – a bit awkward. To guarantee a set amount of income, you’ll need all sorts of expensive, time-consuming legal work. Unless, that is, you invest through a limited company. Here’s why.
When you invest as a group through a limited company, it’s easy to split each investors’ shares based on their contribution. Invest 20% of the deposit? Enjoy 20% of the shares (and the rental income). For total clarity on who owns what, from day one.
With a limited company, you won’t just get clarity – you’ll get security, too. As a shareholder, you’ll be legally protected under your Shareholder Agreement, a document outlining who invested what (deposit), and who gets which share of the profit (rental income). So, if there’s ever a dispute with a fellow shareholder, you’ll always have ironclad legal protection.
Think a limited company structure might just be perfect for you? Give us a call and find out, in a free 15-minute consultation with one of our property experts.
This is for your information only – you shouldn't view this as legal advice, tax advice, investment advice, or any advice at all. While we've tried to make sure this information is accurate and up to date, things can change, so it shouldn't be viewed as totally comprehensive. GetGround always recommends you seek out independent advice before making any investment decisions.